Jon Schreibfeder, STAFDA Inventory Consultant: Cycle Counting, part 1

Cycle counting can eliminate your annual physical inventory.

Without accurate stock level information in your computer, effective inventory management is impossible. No matter what sophisticated tools you have in your inventory management system, if the computer thinks you have 100 pieces of an item, and there are really only three on the shelf, the system won’t replenish your inventory when it should or order the right quantity.

Unfortunately, most distributors only verify the stock balances in their computer once a year, when they perform a physical inventory. During the physical count, every item is counted and, if necessary, the balance in the computer is adjusted to reflect the actual quantity on the shelf. Even if you assume that the physical inventory results in an accurate count of each stocked product (a big assumption for many distributors), how long do the counts remain accurate? One month? Two months? Six months? Eleven months after the physical count, what percentage of stocked products still has an accurate available quantity in the computer?

In order to receive all of the benefits from a good inventory management system, stock balances must be at least 97 percent accurate, every day of the year. This means that the actual available quantity of every item in the warehouse is no more than 3 percent greater or less than the available quantity displayed on your computer inquiry screens. If the computer says there are 100 pieces of an item on the shelf, there should be no less than 97, nor more than 103. Note that 97 percent is the minimum acceptable standard. One hundred percent accuracy is the optimal goal that you should strive to attain.

The best way to ensure that a minimum of 97 percent accuracy is maintained is to continually count your products. That is, count part of your inventory every day. This process is called cycle counting.

There are two methods for determining when to cycle count items that can form the basis for a good plan:

The Geographic Method

The Ranking Method

Using the geographic method, you start at one end of your warehouse and count a certain number of products each day until you reach the other end of your building. This results in counting all of your items an equal number of times per year. Because you are systematically examining the contents of each shelf and bin, the geographic method facilitates the “discovery” of misplaced or lost material; especially the stuff that has been “stashed” between bins. If you implement a geographic count system, try to count each stocked item at least four times per year.

The other method is the ranking method. Our experience shows that the more often a product is received or shipped, the less accurate its computer stock balance. This makes sense. Every time someone goes to the bin is an opportunity for a mistake (or to coin the new term, “unquality event”) to occur. For example, material can be put away in the wrong bin, or the wrong product can be taken to fill an order. The ranking method directs you to count the items with a large number of dollars flowing through inventory (i.e. with the highest annual cost of goods sold) or the most number of transactions (also known as “hits”) more often than slower moving products.

The ranking is based on “Pareto’s Law” (named for the late Italian economist Vilfredo Pareto) which basically states that, in general, 80 percent of the results of any process is produced by 20 percent of the contributing factors. Applied to inventory, this means that approximately 20 percent of your inventory items are responsible for 80 percent of your stock sales.

Pareto did his research on income distribution in Italy in 1897. You might ask, “What does this have to do with your inventory in the year 2012?” The answer is, not much! We have found that for the average distributor no more than 10 to 13 percent of stocked items account for 80 percent of sales. And no more than 50 percent of stocked products account for 95 percent of sales. It is a sobering fact that in all probability the remaining 50 percent of your inventory items account for only 5 percent of sales.

The top 10 to 13 percent of your items (the “A” rank items that account for 80 percent of sales) are probably responsible for most of your inventory discrepancies. These are also the products that are most important in achieving outstanding customer service. After all, they are always being requested. That is why we suggest that “A” ranked products be counted more often than other items in inventory. We suggest:

“A” rank items (responsible for the top 80% of sales) should be counted six times per year

“B” rank items (responsible for the next 15% of sales) should be count twice per year

All other products should be counted once per year

If you run out of time don’t count your dead stock products. That is those with no sales or usage in the past year. They are probably the items with the most accurate counts. They never move!

Though not as effective in finding lost material, the ranking method usually works best for maintaining accurate inventory counts. Because the primary purpose of cycle counting is to verify the quantity on-hand of each item, most distributors prefer the ranking method.

As I hope you can see, there are some definite advantages to implementing a cycle counting program. In our next article, we’ll look at cycle counting procedures, as well as the differences between counting with and without bar-coding equipment. CS

Jon Schreibfeder is president of Effective Inventory Management, Inc. He has authored numerous articles and several books on inventory management best practices and is the designated inventory management consultant for STAFDA. Jon can be reached at 972-304-3325 or by e-mail at info@effectiveinventory.com

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